The Old Age Security (OAS) is a pension paid to all Canadian residents. It is a government-sponsored pension plan that can begin at the age of 65. While the CPP (Canada Pension Plan) payment is directly related to the amount you have contributed to the plan, the OAS is paid out to most Canadian seniors and does not depend on individual contributions.
To qualify for the OAS pension, you need to be a Canadian resident above the age of 65 and lived in Canada for at least 40 years since the age of 18. Moreover, the OAS pension amount is inflation-linked and increases each year.
When will the OAS clawback occur for retirees?
The maximum monthly amount a 65-year-old Canadian could receive in the second quarter (Q2) of 2023 is $691, while it increases to $760 for a resident over the age of 75.
But Canadians should note that the OAS comes with a clawback component when a retiree’s annual net income exceeds a certain threshold.
This threshold is updated annually. For the tax year 2021, it stood at $79,845. The entire OAS amount would be clawed back if your annual income was over $129,757 in 2021.
For instance, if you earned $90,000 in 2021, your OAS payment in 2023 will reduce by $1,523.25 (which is 15% of the difference between $90,000 and $79,845).
But here are three ways for Canadian retirees to delay and avoid an OAS clawback in 2023.
Defer OAS payments
One option Canadian retirees have is to delay their OAS pension by five years, allowing them to increase these payments by 36%, which is quite a good deal. Canadian retirees with substantial cash flows typically defer OAS and CPP to receive higher payments in later years.
Monitor the sale of capital assets
Timing the sale of big-ticket capital assets such as a home is advisable before you begin OAS payments. Retirees should note these situations to better plan cash flows from home sales and avoid the OAS clawback.
Generate income in a TFSA
The TFSA, or Tax-Free Savings Account, is a tool that can be used to minimize your taxable income. All earnings generated from qualified investments in a TFSA are exempt from Canada Revenue Agency taxes.
So, it makes sense to maximize your TFSA contributions and earn income in this registered account by holding a portfolio of blue-chip dividend stocks, such as Royal Bank of Canada (TSX:RY).
Valued at a market cap of $182 billion, RY stock currently offers you a forward yield of 4%, which is quite tasty. The blue-chip TSX stock has already created significant wealth for long-term investors, returning 832% in the last 20 years after adjusting for dividends. In this period, the TSX index returned less than 500%.
Armed with a top-notch balance sheet and a global footprint, RBC also operates a thriving wealth management business. Moreover, priced at 11.1 times forward earnings, Royal Bank of Canada trades at a cheap multiple, making it attractive to value and income investors.
While rising interest rates will lead to a tepid lending environment, it will allow RBC and its peers to benefit from higher profit margins in the near term.
